Applications of Payment for Ecosystem Services in Aceh, Sumatra, Indonesia

This case study examines the potential applications of Payment for Ecosystem Services (PES) in Aceh, on the island of Sumatra, Indonesia. The province of Aceh has experienced severe deforestation in the last several decades, due in large part to the conversion of natural forest into oil palm-producing plantations. While international and public pressure have been growing against this unsustainable land usage, there are options available to alleviate this problem while continuing to provide much needed benefit to low income communities. Tackling the many issues the forests of Aceh face will require bottom-up, localized action at the community level. Encouraging the sustainable management of Aceh’s forests will require motivation, both intrinsic and extrinsic, that both PES and Indonesia’s Social Forestry system can provide. The collaboration of these two systems has the potential to be a powerful force for change. This case study is not intended to be a comprehensive look at any particular PES system, nor is it a detailed study of existing systems in Aceh or Sumatra. It is simply an overview of options that are available, and which can be applied with some success given the circumstances.

Aceh is the northernmost province on the island of Sumatra, Indonesia

Nanggröe Aceh Darussalam, commonly referred to as simply Aceh, is one of the five provinces with special status in Indonesia. At 55,392 square kilometers, this semi-autonomous province is situated on the northern tip of the island of Sumatra[1]. It is surrounded by water on three sides and bordered by Malacca Strait to the north and Indian Ocean to the south. Its adjacent location to the Great Sumatran Fault renders this region substantially mountainous, with notable mountains like Abong Abong and Mount Leuser[2]. These interior mountain ranges are covered by temperate and tropical rainforest and carpeted with mosses and herbaceous plants. There are coastal plains in the northern coast and swamps dotted along the southwestern coast[3].

Aceh has a population of 5,281,300 people[4], and has ten indigenous ethnic groups in the region. Moreover, 98.19% of the population of Aceh identifies as Muslim[5]. Due to this religious majority and the preference for Sharia law, the Indonesian government granted Aceh a special autonomous status among provinces.

2004 Indian Ocean Tsunami

In December 26, 2004, a magnitude 9.1 earthquake with the epicentre off the west coast of northern Sumatra triggered a tsunami which devastated many communities along the coastal regions of the Indian Ocean[6]. Previous social conflict in Aceh contributed to the failure of the tsunami warnings and communication (Scaling the Costs of Natural Ecosystem Degradation and Biodiversity Losses in Aceh Province, Sumatra). With overall casualties in the range of 230,000 people, the majority of the casualties occurred in the coastal city of Banda, Aceh[7]. The destruction caused by the tsunami led to the peace agreement between the government of Indonesia and the Free Aceh Movement[8].

A development plan of Payment for Ecosystem Services was devised after the Tsunami in 2006[9].


Aceh is attributed to being the most biodiverse region in the Asia-Pacific, particularly with the inclusion of Leuser Ecosystem zone[10]. Aceh lies near the Sunda megathrust, a geological subduction fault line which extends from Bali to Myanmar[11]. This geological dynamic presents considerable hazards for the local communities due to frequent earthquakes, tsunamis, landslides, and volcanic eruptions. These geological disturbances along with evolution contributed to creating the highly variable terrain, which offers the diverse habitats of the region[11]. The highly variable landscape provides patchy habitats with their own microclimate and soil conditions, enabling and promoting speciation.  

The government of Aceh aspires to advance a law that opens 1.2 million hectares for commercial use. Discourse has emerged from this proposal[10].

1873-1913 - Aceh War

  • Military conflict between the Sultanate of Aceh and the Kingdom of the Netherlands

1938 - Formation of Persatuan Ulama Seluruh Aceh (PUSA)

  • Achenese Islamic Aceh Seperatist group

1945-1949 - Aceh war of independence

  • Revolution and war of independence against the Dutch

1949-1962 - Darul Islam rebellion

  • Rebellion due to the refusal of the implementation of Sharia Law by the Central Indonesian Government.

1973 - Formation of Partai Persatuan Pembangunan (PPP)

  • Forced fusion of all Islamic political groups into one party

1976-1979 - First Incarnation of Gerakan Aceh Merdeka (GAM)

  • Revolutionary group stemming from the grievance of Suharto’s Government

1989-1991 - Second Incarnation of Gerakan Aceh Merdeka (GAM)

  • Resurgence of the revolutionary group due to the Libyan leader Muammar Gaddafi's policy of supporting nationalist rebellions

1998 - Suharto’s resignation

  • End of Suharto’s Government

1999-2002 - Third Incarnation of Gerakan Aceh Merdeka (GAM)

  • Resurgence of the revolutionary group due to the ineffective central Indonesian government after the fall of Suharto

1999 - Indonesian Law No. 41/1999 on Forestry

  • Indonesia Forest Protection Law

1999 - Indonesian Law No. 44/1999 on Aceh Autonomy

  • Implementation of Sharia Law in Aceh

2001 - Indonesian Law No. 18/2001

  • Change from Province of Aceh Special Region to Province of Nanggroë Aceh Darussalam

2001 - Formal implementation of Social Forestry

2004 - Indian Ocean Tsunami

  • Aceh is among the hardest hit regions

2009 - Indonesian G20 pledge to reduce GHG emissions

  • Pledge to reduce GHG emissions by 26%, plus additional 15% with international assistance

2009 - One Million Oil Palms in Nagan program

  • Distribution of oil-palm seedlings to villages to aid in economic recovery

2014 - Expansion of Social Forestry system begins

2019 - Target date for allocation of land for Social Forestry

  • Allocation of 12.7 million hectares for Social Forestry by 2019

Community-based forestry is a system where the management of a forested land base is the responsibility of a local community living within or close to it. It addresses the issue of centralized and disconnected forest management taking place distant from those whom it has the greatest effect on. Inclusion in decision making and greater control of natural resources have proved empowering for local communities[12]. Because of this, community forestry can be viewed as a form of autonomous, or intrinsic motivation. Autonomous motivation is a form of incentive that influences behaviour based on benefits that are beyond financial or material reward[13].

Central to the idea of community forest management are the concepts of decentralization and devolution. Decentralization is defined as transfer of administrative functions away from a central location and to lower levels of the agency involved, while devolution is defined as transfer of power to local stakeholders away from the central location[14]. Meaningful devolution requires authority figures who make management decision to transfer that authority to the local level, while those local communities have the ability to manage their own resources[14] It is crucial to implement safeguards and monitoring system to ensure proper checks and balances and monitoring of the performance of community level forest managers[14]. A meaningful transfer of decision making requires both decentralization and devolution in policy implementation and time[14]. Otherwise, the contribution of decentralization and devolution will be relatively negligible to sustainable forest management and development. Successful community forestry and its variants implement both decentralization and devolution processes into its programs[14].  

Indonesia has had a long history of traditional community forest management among rural populations for the purpose of trade, culture and subsistence[15]. Since the late 1990s, the Indonesian government has increasingly acknowledged the importance of community involvement in resource management and conservation. In 2001, a formal community forestry program was implemented, officially known as Social Forestry. In 2014, the government of Jocko Widodo initiated an expansion of this program, with the goal to allocate 12.7 million hectares of forest into the formal Social Forestry scheme by 2019.

Payment for Ecosystem Services (PES) is a model that provides financial compensation in return for responsible management of a natural resource or service provided by an ecological system. In practice it represents a paradigm shift in conservation management that recognizes poverty alleviation as being the most effective way to reduce degradation of the environment and associated ecosystem services[16]. The ability to synthesize these two objectives has garnered interest from both the public and private sectors, with capitalization made possible through the increasing scarcity of such services. The question of which systems are best suited to the public or private sphere depends on what the system is intending to achieve.

Due to a lack of an agreed upon definition, Sven Wunder established specific criteria to define an ideal PES system[16]. A pure PES system must be voluntary (as opposed to command and control), measurable, involving at least one buyer, one seller or provider, and the services need to be provided continuously with compliance guaranteed. This system relies upon what Wunder calls conditionality, meaning that payment is contingent upon delivery of the agreed upon service. While this framework provides specificity to an otherwise abstract concept, it is important to note that it is very rare for a PES project to fully meet the criteria.

While periodic cash remuneration installments are a common form of PES, schemes are not limited to direct cash payments. Indirect non-cash payments can include facilitating the transition to more profitable land use systems, purchasing secure tenure, or creating employment opportunities. Asset building PES schemes invest in management systems with the goal of yielding long term benefits, such as eco-tourism or agroforestry systems[17].

There are three main costs associated with implementing a PES system[18]:

  • Transaction and negotiation costs
  • Opportunity costs for foregone economic benefits that would have been associated with a “business as usual” pattern of land-use change
  • Implementation costs

The primary objectives of PES systems can be described using four broad categories: Carbon sequestration, biodiversity and conservation, watershed protection, and landscape aesthetics[19]. While these categories serve as a convenient organizational tool, it is important to consider that benefits arising from PES are often multifaceted, achieving multiple goals simultaneously. Most notably, PES systems often function as a mechanism for poverty alleviation, regardless of their primary objective.

Watershed protection

One of Aceh’s major watersheds, the Krueng Peusangan is over 28,550 hectares in size[20] . This includes the upstream region of Aceh Tengah, a mid stream region of Bener Meriah, and downstream region of Aceh Utara[20]. The Aceh Provincial Government formulated a strategic plan of watershed management of Krueng Peusangan to prevent greater degradation[20]. A comprehensive hydrological study on watershed functions was performed by the World Wildlife Fund in collaboration with the World Agroforestry Centre[20].

A pilot scheme of Payment for Environmental Services was implemented in Aceh to test the policy and regulations[9]. Currently, two Acehenese villages receive rewards provided by a drinking water company[9]. These communities have established a forum -- explain what this means -- to prevent logging in the upstream regions to maintain quality of the water supply[9].

Large-scale PES systems have typically been public sector initiatives with watershed protection as their stated goal. The largest and one of the most successful PES systems in the world is China's Sloping Land Conversion Program, or "Grains for Green". During the mid-20th century, China experienced severe deforestation along many of its productive slopes to facilitate conversion to agriculture. Much of this was during the so-called "Great Leap Forward" with the goal of increasing food production[21]. The conversion of forested land within critical watersheds led to erosion, sedimentation and downstream flooding[21]. In 2000, the Chinese government initiated the Grains for Green program, which provides financial reimbursement to farmers who convert sloping farmland into forest in places with a high risk of erosion[21]. According to FAO, this initiative has resulted in a total forest cover increase of about 18%[22]. Not only can a program such as this reduce erosion and sedimentation, but reforestation also has the added benefit of increased carbon sequestration, as well as habitat continuity. While a considerable success, some issues have arisen as a result of the conversion of high quality farmland, whereas the program was intended for low to moderately productive areas[21]. This has largely been the result of the devolution of authority to local officials, with poor oversight from the central government[21].

A system such as this could prove successful if implemented in Aceh. While it could be implemented by the federal Indonesian government, the issue of Aceh's semi-autonomous governance may prevent proper oversight within the province. With Indonesia's growing need for food production, and the economic incentive for communities to convert forest to farmland, it may be beneficial to implement a payment system to discourage deforestation within critical watersheds.

Carbon sequestration

Indonesia has come under increasing international scrutiny for its deforestation-related carbon emissions. Roughly 80% of Indonesia’s total emissions are derived from land-use change, much of this involving the destruction of natural forest and conversion to agriculture. In 2009, Indonesia pledged at the G-20 Summit to reduce their total emissions by 26%, plus an additional 15% with international assistance[23]. PES systems can provide a useful mechanism to meet these reduction targets, particularly from international sources.

One of the best known PES systems for the purpose of carbon storage and sequestration is the United Nations REDD+ program, or Reducing Emissions from Deforestation and Forest Degradation. It is a mechanism that transfers funds to a body responsible for the management of forested lands, whether that be a community or a government, to reduce unsustainable forest harvesting for the purpose of reducing emissions. REDD+ can be funded both publicly or privately, as well as nationally or internationally. REDD+ has been implemented in Indonesia, with a recent example being $1 billion USD funded by Norway, which is currently the most prominent national donor to the program[24]. However, the initial payment suffered several setbacks of almost a decade due to changes in government as well as the structure of the agreement[25]. Norway's REDD+ funding model is based on a bilateral "payment for performance" approach, a system that they pioneered in the context of REDD+[24]. This model closely aligns with the concept of conditionality established by Wunder.

Like most PES systems, REDD+ funding can be provided in a multitude of ways. Direct cash payments can be made to communities, concession holders, or governmental bodies, while non-cash payments can take the form of investments in employment, sustainable agroforestry, or tourism ventures[18].

While private sector engagement has been limited, there is a desire to see greater levels of private investment in REDD+ programs[26]. Greater private involvement brings competition, and with that an increase in efficiency, productivity and innovation. Much of the hesitation has been related to the uncertainty and slow pace of REDD+ negotiations under the UNFCCC, along with the political and economic risks associated with that[26]. Private sector involvement in REDD+ to date has largely been within the voluntary carbon market, as opposed to compliance schemes that national governments will often commit to[26]. Corporate social responsibility and public relations are currently the biggest motivators for buyers in the voluntary carbon market[19].

Sumatran orangutan (pongo abelii)

Biodiversity and conservation

Aceh is one of the most biodiverse regions in the world. It contains an area known as the Leuser Ecosystem, a 2.6 million hectare expanse of rainforest that is home to the critically endangered Sumatran subspecies of rhinoceros, tiger, elephant and orangutan. While this area is nominally protected under federal Indonesian law, legislative and jurisdictional discrepancies due to Aceh’s relative autonomy have left much of the Leuser Ecosystem open and actively being developed[27]..

A particularly high profile species that is under direct threat is the Sumatran orangutan. The Leuser Ecosystem is home to an estimated 75% of the remaining population of this subspecies. While habitat loss and fragmentation are considered to be the greatest overall threats to the population’s viability, as a primarily arboreal species, orangutans are particularly susceptible to alterations to the forest canopy[28][29]. On of the leading causes of habitat destruction on Sumatra is the conversion of natural forest to industrial oil-palm plantations[27]. These plantations can often cover hundreds of square kilometers, and the high market value of palm oil incentivizes large scale cultivation. Following the 2004 Tsunami, local administrations in Aceh promoted palm-oil plantation expansion to aid in the region's economic recovery. Under the Nagan Sejuta Sawit program ("One Million Oil Palms in Nagan") of 2009, oil-palm seedlings were distributed to local communities to be planted and cultivated as a source of income. The IUCN considers the single greatest threat to the remaining orangutan population to be the land use plan implemented within the Leuser Ecosystem by the government of Aceh, which runs counter to the federal commitment to conservation[27].

A study was conducted examining rural communities in Aceh and their behaviour toward orangutan conservation. It was found that a combination of both autonomous and heteronomous motivations was needed to achieve a real change in conservation behaviour[13]. Autonomous motivation, such as a sense of responsibility, can often lead to a change in attitude but not necessarily behaviour, as the lack of heteronomous or extrinsic incentives will allow one to forgo their values in exchange for economic priorities[13]. In many communities, orangutans are viewed as either a pest or with indifference. Human-orangutan conflicts are common, particularly when they are foraging among crops, or living within a harvest area. An expansion of community autonomy and responsibility over natural resources under the Social Forestry program would be a substantial form of autonomous motivation. When combined with a PES system to reduce deforestation and land conversion such as REDD+ or a specially designed system for orangutan conservation, it could provide the economic incentive needed for a heteronomous motivation for behavioural change. While extrinsic motivation may be required to associate economic benefit with conservation, autonomous motivation is needed to facilitate long term, meaningful change. Payments under any system must however surpass the opportunity cost of forgoing the benefits of land conversion, for a community to act with a conservation minded approach, regardless of attitude.

Landscape aesthetics and eco-tourism

Indonesia's remarkable biodiversity and scenery make it a world hot-spot for eco-tourism. As much of this demand for tourism revolves around endangered megafauna and pristine tropical rainforest, there is an incentive to protect as much as possible. Tourism can be a long term benefit requiring little relative impact to the natural landscape. It has been suggested that alternative forms of employment are on the whole a better investment for communities than direct cash benefits[18]. Eco-tourism is potentially a lucrative investment for private sector interests in particular, which is often discouraged from PES systems through a lack of incentive. Not only can it provide a reliable long term cash flow, it also has direct benefits to the local communities through the building of lodges, hiring guides, and the broader economic impacts associated with increased tourism to a region. A community, or association of communities under the Social Forestry system could establish a tourism company in partnership with private or public interests. Such an agreement could be predicated on the retention of natural forest habitat and ecosystems, which would aid in not only the conservation of endangered species, but the continued storage of carbon. If implemented correctly, an eco-tourism based model could be a well rounded approach to achieving most, if not all, of the main established PES objectives.

Poverty alleviation

As of 2017, Aceh is the poorest province on the island of Sumatra, with roughly 16% of the population below the poverty line[30]. While government programs such as rice allocations have been helping, more participation in the Social Forestry programme among communities would further this reduction. While there exists a cyclical relationship between poverty and environmental degradation[31], conversely there is also a connection between degradation and efforts to reduce poverty. As undeveloped nations have attempted to increase their living standards, it has often come at the expense of their ecological integrity. This has been made abundantly clear in Indonesia, where much of its economic growth has relied on the destruction of its natural capital. PES provides a potential opportunity to break this cycle; by providing economic benefit to low income communities while simultaneously meeting desired conservation objectives. An effective PES system with poverty alleviation as its primary goal is better suited to being managed by the government, as there is a lack of reliable incentive for the private sector to make such an investment[16]. While there is little incentive for poverty alleviation to be the primary objective in a privately funded PES scheme, there is great potential for it to be an indirect benefit in a system focused on other objectives such as emissions reduction or ecotourism.

Criticism and drawbacks

Most PES systems are unlikely to match the opportunity cost of highly profitable land usage[16]. It is instead desirable to focus on areas with marginal land value, but moderate to high conservation potential[16]. The efficiency of PES systems can be hampered by focusing on payments for conservation or reforestation that would likely have happened anyway; in other words, only those who represent a threat to existing services should be eligible for payment[16]. Uncertainty still remains, particularly among the private sector. Potential service buyers are often hesitant to pay due to a poor understanding of the link between ecosystem services and land use[16]. Limited knowledge of how ecosystem services can be capitalized is also an issue, especially in regards to negotiating a value for intangible service[16]. Poor governance and weak enforcement can reduce investor confidence, while also limiting the effectiveness of government funded initiatives. While the Indonesian government under Widodo is committed to reducing deforestation, its ability to overrule decisions made in Aceh is severely limited. This can have a limiting affect on the willingness to invest in conservation initiatives within the province. Much of the current conservation paradigm is centered on heteronomous financial motivation[13]. While this is necessary to incentivize conservation, direct cash payments can also encourage selfishness and unethical behaviour among individuals or communities[13].

While many rural dwelling people in Aceh find steady work on large oil palm plantations, it has been found that they often have little interest beyond economic reasons to work in such an environment[18]. This is largely due to an important cultural connection many hold to their own smallholder farming and the perceived theft of land they consider their own[18]. By providing the necessary motivation, it is possible to incentivize a greater shift away from palm-oil reliance among communities. While this is hardly a path to reduce large scale industrial plantations, it is however an opportunity to reduce reliance on destructive forms of cultivation within community forest tenures.

The implementation of PES systems in Aceh should be designed with three overarching goals:

  • Avoid bureaucracy by having more privately funded PES programs initiated directly with communities rather than through provincial or federal governments.
  • Further integration between PES and the continued government expansion of the Social Forestry system to reduce community dependence on destructive harvesting and agricultural practices.
  • Reduce community reliance on destructive harvesting and agricultural practices such as palm-oil cultivation in plantation settings, while providing a path to poverty alleviation and economic diversification.

While any PES system can lead to poverty reduction, the need to increase private involvement suggests that poverty alleviation should be treated as a secondary, but still important co-benefit to the primary goals that are to be achieved. REDD+ schemes have been shown to be particularly capable at providing a multitude of benefits. While primarily focused on reducing emissions via deforestation, they can also protect valuable habitat and sensitive watersheds, provide alternative employment, encourage economic diversification, and aid in the alleviation of poverty.

Increased emphasis on linking REDD+ to voluntary carbon markets is necessary to attract more private sector investment. Increased involvement of this sector, particularly when investment is directly injected into communities, will reduce both capital and time wastage that will inevitably occur through government involvement. This is particularly important in jurisdictions where corruption is still rampant, and the legal discrepancy between Aceh and the federal government is still a major factor in discouraging investment. The Indonesian government needs to continue its planned expansion of the social forestry program, ensuring that communities are consulted and involved with the process. A customized approach tailored to specific groups or individual communities is most effective[16]. This maximizes the autonomy and responsibility among individuals, thus providing the autonomous motivation required for bottom-up attitudinal and behavioural change. Understanding of individual cultures and concerns should also be prioritized, so mutual objectives can be agreed upon.

The government of Aceh for its part can aim to ensure that tenure and excludability established in the federal Social Forestry program are upheld, and justly enforced. Neither communities, nor potential investors will see the benefits of such programs if there are not clear and defined rules around control of resources. Upon agreement of a PES scheme, smaller periodic installments should be favoured over lump sum payments if possible, as it is more likely to encourage long term motivation as well reduce difficulties associated with monitoring proper allocation of funds[16]. Small, carefully monitored payments may also help reduce the negative effects of cash influxes into communities such as selfishness and corruption.

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